NIFTY versus the Sectors

Market correction: “When” not “If”?

We’ve all been bracing for it for a while now. At Price-Earnings of 25+, NIFTY PE is now two full standard deviations above its median value of 19, that suggests or rather shouts “correction coming!”.

Source: nifty-pe-ratio.com

Simply put, we’re paying ₹25 for each ₹ of Earnings from the 50 companies in the NIFTY. Put it another way, if earnings of NIFTY companies stay at the current level, and if they pay out 100% of their earnings to shareholders, it will take 25 years to recover your investment.

You’re thinking that makes no sense. Even the median value implies 19 years of earnings. True, because the assumption inherent in buying stocks is that earnings will increase in the future making them worth the multiple you pay in the present.

History suggests every time stocks get this expensive, something has to give. Either earnings have to grow dramatically to bring down the P/E ratio OR the price (market) has to correct.

So as of early December 2017, the base case has to be a significant correction in the next few months. But don’t fall into the trap of thinking it’s possible to predict markets. I even tried!

Problem is, that correction might come in the next 18 days, or not for another 18 months. Also the indicators in the above chart only represent the fifty largest stocks by free float market capitalisation. 5 things not commonly known about the NIFTY

NIFTY versus the sectors

I was curious about how various sectors have done over time with respect to the NIFTY and there are any lessons in how they tend to move. To use that to identify the safest sectors to be invested in.

Some sectors are more equal than others

The chart below shows eight sectoral NSE indices plotted with the NIFTY from Jan 2000 to Dec 2017. The Bank, Auto, FMCG and Pharma indices have outperformed cumulatively while commodities, media and IT have underperformed. The realty index being the only value destroyer since it’s inception in Dec 2006.

Some much more equal

NIFTY

AUTO

BANK

FMCG

IT

MEDIA

PHARMA

REALTY

COMMODITIES

Annual Return %

10.9

18.9

19.3

12.7

5.1

10.5

13.9

(9.9)

10.2

Volatility %

33

54

41

22

45

44

28

56

46

100 became...

635

1110

2382

845

245

329

904

32

386

Best Year

2003

2009

2003

2005

2009

2009

2003

2017 YTD

2007

Worst Year

2008

Underperformed NIFTY (% of years)

29%

28%

39%

56%

50%

41%

73%

69%

Together in declines but not in advances

Cumulative pictures tend to hide year-on-year performance, so here’s a look at annual calendar year returns from 2000 to 2017.

I was hoping to find some “safe haven” sectors that move counter to the NIFTY, especially when it declines. The years 2000, 2008, 2011 show that market declines tend to be secular with all sectors participating. FMCG lives up to it’s tag of “defensive” sector by declining less than the broader market.

Overall, when markets correct, it’s hard to find places to hide

What’s next:

to see how far sectoral PEs are from their median values. Are there any “bomb shelters”?

look for pockets of reasonable valuations across sectors and market caps